Alternative Funds 2019

Last Updated September 05, 2019

Cayman Islands

Law and Practice

Authors



Travers Thorp Alberga Attorneys-at-Law is a boutique Cayman Islands and British Virgin Islands law firm designed for the post-financial crisis environment. It has highly experienced partners who specialise in structuring complex funds and advising on related regulatory issues. From their offices in Grand Cayman, the British Virgin Islands, Hong Kong and Australia, they provide incisive and effective advice to the highest standard for all types of offshore entity, including hedge funds, private equity funds, corporate and partnership vehicles, asset and structured finance vehicles, cryptocurrencies and ICOs.

The Cayman Islands has been the prime location for the establishment of offshore alternative fund structures for over two decades. There are approximately 7,600 open-end funds and an additional 2,900 master funds currently registered with the Cayman Islands Monetary Authority (CIMA). In addition, exempted limited partnerships, used primarily for private equity investment, have increased to some 21,000. Based on CIMA figures, the AUM for open-end funds is approximately USD2.5 trillion, so an estimate of the total US dollar value of Cayman Islands open and closed-end funds may be put at USD5 trillion. This figure represents approximately two-thirds of global alternative fund flows. In addition, the Cayman Islands has approximately 2,900 registered or licensed fund managers. 

The legal and regulatory framework in the Cayman Islands is predicated on the understanding that Cayman Islands fund structures are primarily intended for investment by institutional and sophisticated market participants and are not marketed to retail investors in the Cayman Islands or elsewhere. It also follows that Cayman Islands fund structures comply with the onshore legal and regulatory requirements in the jurisdictions in which the fund interests are marketed. The Cayman Islands has extensive domestic anti-money laundering controls and tax information reporting to the latest international standards and is fully compliant with FATCA and CRS. 

CIMA has no statutory authority to restrict investment strategy and Cayman Islands funds are therefore used for the full range of alternative strategies, including hedge, private equity, venture capital, infrastructure, real estate and private debt, as well as traditional long-only investing. Cayman Islands structures are also used for managed account arrangements, family offices, incentive compensation vehicles and co-investment structures. 

Cayman Islands funds are usually formed as exempted companies, exempted limited partnerships or unit trusts. Given the inherent flexibility available in the constitutional documents, the choice of form and structure of the vehicle is invariably driven by the onshore legal, tax, regulatory and marketing requirements of the fund promoter, based on the location of the target investors or of the investments. The most common legal forms are summarised below. 

Companies

The Cayman Islands company follows the UK form with important modifications (notably, with regard to the ability to indemnify and exculpate directors). Thus, the exempted company has a separate corporate personality and may issue shares with limited liability to investors. The company is managed by its board of directors, who may delegate functions in accordance with UK legal principles. The corporate regime is extremely flexible, for example, there is no requirement for Cayman Islands resident directors and redeemable, fractional and treasury shares are permitted. Subject to solvency, there is no material restriction on distributions to shareholders. 

Segregated portfolio companies may be formed which create separate portfolios of assets and liabilities, with the benefit of statutory segregation between portfolios, thus "ring-fencing" creditor claims to the relevant portfolio. 

Additionally, limited liability companies (or LLCs) modelled on the Delaware code, which are managed by their members or a board of managers, have proved attractive. LLCs wereintroduced in 2016 and are as yet less common for fund structures, though they are increasingly popular as the legal structure for the fund manager, given their ability to include joint venture or shareholder agreement provisions directly within a single constitutional operating agreement. In this guide, it is assumed that Cayman Islands funds are not formed as LLCs.

Exempted Limited Partnerships

Exempted limited partnerships are based on legislation similar to the Delaware model and, while regarded as a legal entity, they do not have a separate legal personality. The general partner has control of the partnership and is liable for its debts, and engages the fund manager and other service providers as necessary. Subject to solvency there is no restriction on distributions to partners. At least one general partner, who may be an individual, must be resident or formed in the Cayman Islands or, if formed elsewhere, must be registered as a branch in the Cayman Islands. 

Unit Trusts

A unit trust is a pooled investment vehicle organised as a common law trust which is, as with the exempted limited partnership, regarded as a legal entity, though without separate legal personality. As in the United Kingdom, the trustee of the trust has legal ownership of the trust assets and control, although it will typically delegate investment function to the fund manager and custody and administration to other service providers. Each investor subscribes for units in the trust, with the rights attaching to those units set out in the trust deed. The trust, as a creature of common law, provides a structure that is flexible; the terms of the trust are not subject to any statutory framework. Subject to solvency, there are no restrictions on distributions to unitholders. A unit trust will typically, for reasons related to conflict of laws, have a licensed trustee based in the Cayman Islands.

Choice of Structure

In the absence of rules restricting investment terms or the capital structure of a Cayman Islands fund, there is wide flexibility in the investment strategy, choice of service providers and in the economic and voting entitlements of investors in the fund. For example, multi-series and multi-class structuring is widely adopted, allowing for the creation of tailored investment exposures or fee or carried interest arrangements. Umbrella fund, side pocket and performance fee equalisation features are also typical. Given these flexibilities, the choice of fund structure in the Cayman Islands is invariably determined by onshore legal, regulatory, tax or business requirements. 

Typically, hedge fund strategies utilise the corporate form and issue shares on a fully paid basis, whereas private equity and real estate funds tend to use limited partnership structures where interests are issued partly paid subject to further drawdown to match the slower rate of capital deployment. Unit trust structures are often attractive to Japanese investors for local tax and regulatory purposes – indeed, there are uniquely specific regulations under the Mutual Funds Law and approved under Japanese law, to enable retail marketing of Cayman Islands funds in Japan.

Funds Subject to Regulation

Cayman Islands funds, whether formed as a company, limited partnership or unit trust, which offer redeemable equity interests to investors, are regulated by CIMA under the Mutual Funds Law. In addition, Cayman Islands “master funds” to regulated “feeder funds” are separately regulated.

An exemption from regulation by CIMA applies to funds with 15 or fewer investors, where those investors may appoint and remove the fund’s directors, general partner or trustee (however, this exemption is not available to a fund that is operating as a “master fund”). Closed-end funds are not subject to regulation by CIMA under the Mutual Funds Law, or otherwise, although they are generally permitted to register on an elective basis if they wish, which may be advantageous for broader tax, regulatory or trading reasons. 

There are three methods of regulation under the Mutual Funds Law:

  • fast-track registration method – provided the minimum investment level is at least USD100,000 per investor (or the equity interests are listed on the Cayman Islands or other specified exchange), automatic registration can be achieved upon electronic filing of the relevant forms, consent letters, placement memorandum and supporting documentation, and on payment of the first year and annual fees of USD4,268 (or USD3,049, if a “master fund”). In addition, a supplemental fee of USD366 is payable with the initial application and upon the filing of the auditor’s annual report and accounts. Registration is automatic and without review or approval of the placement memorandum or other terms of the fund by CIMA. This is the typical method of registration; 
  • local administrator registration method – regulation can also be achieved by appointing a local administrator as the fund’s "principal office", filing the relevant documentation with CIMA and paying the fees. Under this method, the local administrator assumes a supervisory responsibility with respect to the fund. Given the flexibility of fast-track registration, this method is less commonly used, however, it has the advantage of the absence of a minimum investment amount per investor; and
  • CIMA licensing method – regulation can be achieved by direct licensing from CIMA. In this case, CIMA will conduct a substantive assessment in respect of the applicant fund, which shall include the competency of the service providers and whether the fund is expected to be properly run. Given the flexibility of the fast-track method, this licensing method is seldom used. CIMA may also apply specific conditions to a licensed fund, although in the remainder of this guide, it is assumed no license conditions are imposed. 

Statutory Obligations of Funds Regulated by CIMA

Regulated funds are subject to limited oversight by CIMA. In addition to annual fee obligations, the statutory obligations include:

  • local auditor – a Cayman Islands firm of approved auditors must be appointed and the audited accounts filed with CIMA annually. Typically, the audit work is conducted by the affiliate of the auditor in the jurisdiction of the fund manager where the trading records are maintained, with the final stages of the audit conducted by the Cayman Islands firm. The auditor also files an annual report with CIMA containing basic information on the fund’s business; 
  • directors – a minimum of two individual directors, or one corporate director, are required for funds structured as a company which are registered under the Mutual Funds Law. As indicated below, the directors to corporate funds registered under the Mutual Funds Law are required to register with, and in certain circumstances be licensed by, CIMA pursuant to the Directors Registration and Licensing Law;
  • filing of the placement memorandum – CIMA must be provided with any revised placement memorandum and notified of any material changes to the fund’s structure; and
  • disclosure standard – the statutory test replicates the basic common law principles (see 4.6 Disclosure Requirements). 

Absence of Investment Restrictions

Cayman Islands law and regulation imposes no investment or borrowing restrictions on Cayman Islands funds, irrespective of whether the fund is regulated under the Mutual Funds Law. Needless to say, a Cayman Islands fund is required to observe all applicable international sanctions and criminal laws, including the EU/UK sanctions as extended to the Cayman Islands (such as the ISIL, Sebastopol and North Korea sanctions) and laws relating to restricted drugs (such as cannabis investments) or their proceeds. 

Absence of Service Provider Restrictions

Cayman Islands law imposes virtually no requirements in respect of the fund’s service providers or their location (see 2.8 Other Local Requirements).

Minimal Further Regulatory Intrusion

The following regulatory laws generally apply to funds, irrespective of whether the fund is regulated under the Mutual Funds Law, although their impact is not significantly incremental:

  • AML/CFT – Cayman Islands funds are subject to international standards in respect of anti-money laundering, countering terrorist financing and anti-proliferation financing controls, including the adoption of compliance procedures and controls and the appointment of compliance officers. Cayman Islands funds invariably operate on a delegated model under which the fund outsources the day-to-day aspects to the fund administrator. Fund administrators globally are entirely familiar with the relevant procedures; 
  • FATCA/CRS – Cayman Islands funds are subject to international standards in respect of the automatic reporting of tax information under FATCA and CRS – see 4.8 FATCA/CRS Compliance Regime. Again, fund administrators are entirely familiar with the relevant procedures; 
  • Data Protection Law – on 30 September 2019, the Cayman Islands Data Protection Law came into force, under which Cayman Islands funds would typically be considered data controllers and therefore responsible for compliance with applicable data protection principles. The Data Protection Law is modelled on the United Kingdom Data Protection Act 1998 which pre-dates the GDPR. This should not have any significant impact on Cayman Islands funds, as the service providers to Cayman Islands funds are usually compliant with similar regimes globally; 
  • Directors Registration and Licensing Law – the individual directors to a corporate fund registered under the Mutual Funds Law are required to be registered with CIMA. Registration is straightforward and is undertaken through CIMA’s online portal. CIMA makes no assessment of the competency of the directors, but may reject registration on the basis that the director has been convicted of a criminal offence involving fraud or dishonesty or is the subject of an adverse finding, financial penalty, sanction or disciplinary action by a regulator, self-regulatory organisation or a professional disciplinary body. Where a director provides services to 20 or more funds or fund managers registered with or licensed by CIMA, a licence under the Directors Registration and Licensing Law may be required. Corporate directors to such funds are rarely used and are subject to additional licensing requirements; International Tax Co-operation (Economic Substance) Law – as discussed under 2.8 Other Local Requirements, Cayman Islands funds fall wholly outside the economic substance regime of the Cayman Islands and thus have no obligation to establish a physical presence or take material business actions in the Cayman Islands; and 
  • Local Business Licensing Laws – Cayman Islands funds are not subject to the Cayman Islands Local Companies Control Law (relating to local business ownership) or the Trade and Business Licensing Law (relating to the licensing of domestic business).

Absence of Investor Protection Scheme

There is no investor protection scheme in the Cayman Islands, which is the appropriate position given that Cayman Islands funds are typically not marketed retail but are investment vehicles for institutional, sophisticated or high net worth investors.

Cayman Islands Stock Exchange listing

Cayman Islands funds may apply to list their equity interests on the Cayman Islands Stock Exchange which entails meeting certain suitability, service provider and disclosure standards. Listing is relatively uncommon and is usually driven by the promoter’s marketing needs. In the remainder of this guide, it is assumed the funds are not listed. 

There are no restrictions under Cayman Islands law in respect of the origination, holding, warehousing or disposal of loans by Cayman Islands funds. In addition, there are no risk retention rules in respect of loan originators or loan securitisation vehicles under Cayman Islands law. There are no usury or similar laws in the Cayman Islands.

Cayman Islands law imposes no investment restrictions on funds structures. Accordingly, Cayman Islands investment funds may invest in cryptocurrencies, works of art, fine wine and other “alternative alternatives”. As a practical matter, assets of this kind may entail novel or risky features (eg, as to valuation, safe keeping or illiquidity) which will normally lead to specific fund terms designed to protect the fund and its service providers accordingly.

It is also worth noting that there is no restriction on a Cayman Islands fund wishing to accept subscriptions in specie, including in the form of non-traditional assets. However, caution should be exercised where there are valuation uncertainties or difficulties in establishing the source of funds for anti-money laundering or similar purposes.

Open-end funds due to be regulated under the Mutual Funds Law, using either the fast-track or local administrator fund category referred to in 2.3 Regulatory Regime, will typically be registered by CIMA within three to five days of a comprehensive filing. There is no prudential review by CIMA, and CIMA routinely grants a registration date corresponding to the date of filing. 

Applications by open-end funds for direct licensing from CIMA under the Mutual Funds Law typically take six to eight weeks from the date of a comprehensive filing. In this case, CIMA will make a substantive assessment of the fund characteristics. As indicated, this method of regulation is seldom adopted.

Cayman Islands law and regulation imposes no requirement on Cayman Islands funds to appoint a fund manager, or as to the type or location. Many funds established as exempted limited partnerships simply operate through their general partners.

Service Providers under the Mutual Funds Law, AML/CFT Regime and FATCA/CRS Regime

Cayman Islands law imposes very few regulatory requirements in respect of the service providers to a Cayman Islands fund, save with regard to:

  • the Mutual Funds Law – Cayman Islands funds which are regulated under the Mutual Funds Law are required:
    1. to appoint a Cayman Islands-based approved auditor; 
    2. to ensure the directors of a fund formed as a company, not being less than two in number where they are individuals, are duly registered and, as applicable, licensed under the Directors Registration and Licensing Law (though the directors can be located anywhere in the world); and
    3. to identify or appoint an administrator which may be the general partner, the manager or an affiliate (and in the case of a fund which is regulated under the “local administrator” method, the administrator is required to be licensed by CIMA).

Funds that are not regulated under the Mutual Funds Law are not subject to these requirements; 

  • AML/CFT – Cayman Islands funds are required to appoint anti-money laundering (AML)/countering terrorist financing (CFT) officers, including an anti-money laundering compliance officer, a money-laundering reporting officer and a deputy money-laundering reporting officer. The officers may be located anywhere in the world and be provided by the fund promoter or a third-party firm (such as the fund administrator) as long as they are able to discharge their responsibilities. However, in every respect, these functions are not substantively duplicative as the administrator will necessarily undertake the primary responsibility with regard to AML/CFT; and
  • FATCA/CRS – Cayman Islands funds are required to appoint an authorised person and principal point of contact for corresponding with the Tax Information Authority of the Cayman Islands in respect of FATCA and CRS reporting. They may be located anywhere in the world.

Service Provider Obligations Arising under Companies Law, Exempted Limited Partnerships Law and Trusts Law 

A Cayman Islands fund formed as an exempted company is required by the Companies Law to maintain a registered office in the Cayman Islands with a locally regulated provider. 

A Cayman Islands fund formed as an exempted limited partnership is required by the Exempted Limited Partnerships Law to maintain a registered office in the Cayman Islands with a locally regulated provider. The general partner to a Cayman Islands exempted limited partnership is required to be:

  • a Cayman Islands company;
  • an overseas company which has registered as a foreign company under the Cayman Islands Companies Law;
  • a Cayman Islands exempted limited partnership;
  • a foreign limited partnership which has registered as a foreign partnership under the Cayman Islands Exempted Limited Partnerships Law; or
  • an individual resident in the Cayman Islands.

A unit trust fund organised under Cayman Islands law, for reasons relating to conflict of laws, would almost invariably appoint a local Cayman Islands trust company which is duly licensed under the Banks and Trusts Companies Law as its trustee (this has been assumed to be the case in this guide).

Economic Substance Regime

Cayman Islands funds are specifically excluded from the economic substance regime established by The International Tax Co-operation (Economic Substance) Law of the Cayman Islands. Under this regime, a fund is defined to mean “an entity whose principal business is the issuing of investment interests to raise funds or pool investor funds with the aim of enabling a holder of such an investment interest to benefit from the profits or gains from the entity's acquisition, holding, management or disposal of investments and includes any entity through which an investment fund directly or indirectly invests or operates (but not an entity that is itself the ultimate investment held).” 

Accordingly, all funds, including feeder funds and master funds, their operators and their downstream investment holding subsidiaries, and many co-investment vehicles are entirely outside the scope of the economic substance regime. 

There are no substantive restrictions under Cayman Islands law as to the selection or location of service providers to a Cayman Islands fund – see 2.8 Other Local Requirements and 3.7 Local Substance Requirements.

Service providers (including any administrator, custodian, manager, adviser or broker) to a Cayman Islands fund which are not based in the Cayman Islands are generally not subject to Cayman Islands regulation or registration requirements. 

Where a foreign service provider establishes a place of business in the Cayman Islands, then it may become subject to the regulatory laws of the Cayman Islands. For example, a foreign director service firm or fund administration firm with a place of business in the Cayman Islands would be required to be licensed by CIMA under the Companies Management Law (as a company manager) and the Mutual Funds Law (as a mutual fund administrator) respectively. A foreign service provider would not establish a place of business in the Cayman Islands solely by virtue of providing services to a Cayman Islands fund from an office outside of the Cayman Islands.

The Cayman Islands has an indirect system of taxation as a matter of centuries-old fiscal policy. Accordingly, there are no direct taxes imposed under Cayman Islands law on the profits, income, gains or appreciations of Cayman Islands funds and there is no withholding in respect of any dividend, distribution or interest payment by a Cayman Islands fund. Nominal stamp duties apply to documents executed or brought into the Cayman Islands. There are no exchange or currency controls in the Cayman Islands.

A Cayman Islands fund formed as an exempted company that desires additional reassurance may obtain from the Governor-in-Cabinet of the Cayman Islands an undertaking certificate that for a period of 20 years from the date of the certificate no laws of the Cayman Islands imposing any tax on profits, income, gains or appreciation shall apply to the fund and that no tax in the nature of estate duty or inheritance tax shall be payable on the equity interests of the fund. An exempted limited partnership fund and an LLC may obtain a similar undertaking for a period of 50 years. A unit trust fund may also obtain a similar undertaking for a period of 50 years provided it excludes investors resident or domiciled in the Cayman Islands (other than Cayman Islands exempted companies and non-resident companies).

Cayman Islands fund structures are generally subject to the FATCA and CRS reporting regimes of the Cayman Islands as discussed below in 4.8 FATCA/CRS Compliance Regime.

The Cayman Islands has no double-tax treaties relevant to investment fund business, although a double-tax treaty in the jurisdiction of ultimate investment may be accessed by a limited partner through a sophisticated form of limited partnership structuring. 

Many Cayman Islands fund structures use subsidiaries for a variety of investment and wider purposes. For example, funds routinely structure their investments through subsidiaries so that: 

  • disposal transactions can be facilitated through the sale of the subsidiary as opposed to disposing of the underlying investment itself – in particular, where the investment stake is subject to transfer restrictions; 
  • investments may be established, maintained or disposed of in a tax-efficient manner (eg, to obtain the benefits of a double-tax treaty, to achieve an offshore capital gains event or to establish a tax blocker); 
  • higher-risk trading strategies are ring-fenced;
  • the fund may aggregate investments for efficient management with parallel funds and co-investors; or 
  • local ownership rules relating to the jurisdiction of the underlying investment are met.

In addition, as discussed under 2.2 Fund Structures, many funds operate on a master feeder basis, whereby the master fund effectively operates as a subsidiary to one or more feeder funds in order to aggregate investments for the purposes of efficient trading of a portfolio.

The promoters and sponsors of Cayman Islands funds are located globally, reflecting the scale of the alternatives industry and the recognition of Cayman Islands fund structures. The majority of promoters and sponsors are based in the major financial hubs, such as New York, London, Tokyo, Shanghai, Hong Kong, Singapore and Sydney, where the major Cayman Islands law firms have office networks. 

Generally speaking, Cayman Islands funds are recognised as attractive vehicles for institutional, sophisticated and high net worth (as opposed to retail) investors the world over. So, for example, United States taxable investors will often invest in a Cayman Islands master fund through a local onshore United States-based feeder fund, though non-taxable United States investors may prefer to invest into the master fund through a Cayman Islands feeder fund or other blocker corporation, to avoid certain US taxation. The significant exception to the global appeal of Cayman Islands funds results from restrictive and targeted European Union legislation. Cayman Islands funds have, as a consequence, proved less popular with investors within the EU, and the ability to market Cayman Islands securities in the EU is becoming increasingly limited. As it is, less than 8% of Cayman fund investment originates in the EU and this will decline in future.

Given the absence of investment restrictions, Cayman Islands funds deploy their assets globally and can adopt a full range of strategies for liquid and illiquid investments without restriction. Owing to the global reach of the Cayman Islands funds industry, the relative deployment of capital by Cayman Islands funds corresponds to the relative size of the world’s financial and business markets. Thus, the majority of capital is ultimately deployed in the larger regions such as the United States, United Kingdom, Singapore or Japan, whether as capital markets transactions on a market/exchange or as local private company investments based on prevailing opportunities. In addition, Cayman Islands funds are routinely used for investment in less-established regions or emerging markets, although, where applicable, structuring may be routed through an intermediary jurisdiction with the benefit of a double-taxation treaty. 

Cayman Islands funds have, historically, dominated the alternatives investment industry, and therefore, the global trends seen in the industry are reflected in the Cayman Islands. In terms of the growth of the alternatives industry, general market observations (see, for example, the Preqin Overview of Alternatives 2018) suggest that the alternatives industry has perhaps tripled in AUM over the last decade and is likely to increase by another 50% by 2023. Within the more recent growth, there has also been a distinct acceleration in the private equity sector, with hedge fund assets rising at a slower rate, seemingly due to relatively poor recent hedge fund performance and the increasing regulatory burden imposed on onshore fund managers. In terms of new launch activity, with increased onshore compliance costs, the minimum launch size for new managers is increasing, which in turn is tending to skew new launches towards the established investment management groups and away from start-ups.

Regarding regulatory developments, the global initiatives to enhance AML/CFT regulations and to establish FATCA/CRS regimes have proved generally positive for Cayman Islands funds, as the jurisdiction has always attracted high-quality asset managers and service providers. These factors will no doubt continue to drive business to the Cayman Islands at the expense of offshore jurisdictions with less well-developed infrastructure.

As for competition from other jurisdictions, it appears that onshore EU alternatives funds, while perhaps offering marketing benefits within narrow domestic investor segments, are also costly, restrictive and slow to implement, leading to impaired relative performance. It is probable, too, that political turmoil in some jurisdictions will cause promoters to pause before establishing funds outside known jurisdictions, such as the Cayman Islands, which demonstrate a long history of political and legal stability.

A Cayman Islands fund which is registered or licensed under the Mutual Funds Law is required to file the following with CIMA:

  • audited accounts within six months of the financial year end;
  • an annual return setting out the basic particulars of the fund and its service providers, together with summary data as to the fund’s financial position and investment portfolio;
  • any changes to the key terms or service providers of the fund; and
  • a current Offering Memorandum, while equity interests are offered. In addition, CIMA has issued guidance requiring registered or licensed funds to notify CIMA of any matter which could materially and/or adversely affect the financial soundness of the fund, and of breach of law or regulation. 

There are no mandatory reporting or disclosure requirements upon Cayman Islands funds which are not registered or licensed under the Mutual Funds Law (save as may arise under the anti-money laundering, countering terrorist financing, anti-proliferation financing and tax reporting regimes).

The disclosure standards applicable to Cayman Islands funds are discussed in 4.6 Disclosure Requirements, below. 

There are currently no prospective changes to the Cayman Islands funds regime described above. As mentioned in 2.3 Regulatory Regime, the Cayman Islands data protection regime took effect on 30 September 2019. 

Cayman Islands-based fund managers are typically formed as Cayman Islands exempted companies or LLCs, though there is no prohibition on the use of Cayman Islands partnerships. In addition, a foreign fund management company may establish a place of business in the Cayman Islands. 

As indicated in 2.7 Requirement for Local Investment Managers, there is no requirement upon Cayman Islands funds to appoint a Cayman Islands-based investment manager. Doing so effectively would require a detailed consideration of onshore transfer pricing rules and the new economic substance rules. 

Securities Investment Business Law

The Securities Investment Business Law of the Cayman Islands regulates, among other things, the activity of managing, advising upon and arranging deals in securities by a person organised under Cayman Islands law, or otherwise with a place of business in the Cayman Islands. The “managing” and “advising upon” activities capture traditional asset and risk management decisions, whereas “arranging deals” covers private negotiation of investments and the distribution or placement of equity interests in the fund itself. “Securities” are defined under the Securities Investment Business Law to include a wide range of equity, debt, commodities, futures, options and similar instruments. Accordingly, the vast majority of Cayman Islands-based fund managers are required to be registered with, or licensed by, CIMA. 

Notably, real estate and cryptographic tokens/coins generally fall outside the definition of securities. Accordingly, a manager of these assets would not be regulated under the Securities Investment Business Law. However, the fund manager may require licensing by CIMA under the Companies Management Law, as a company manager, or Mutual Funds Law, as a mutual fund administrator, depending on the particular structure. 

See 3.7 Local Substance Requirements for a summary of the economic substance regime as it relates to Cayman Islands-based fund managers. 

Registrable Persons under the Securities Investment Business Law

If fund managers:

  • provide fund management services to funds comprising:
    1. sophisticated persons – being persons
      1. who by virtue of knowledge and experience in financial and business matters can reasonably be regarded as capable of evaluating the merits of the investment and invest at least USD100,000; or

ii) regulated by CIMA or a recognised overseas regulatory authority; or

iii) whose securities are listed on a recognised securities exchange; or 

    1. high net worth persons – being individuals whose net worth is at least USD1,000,000, or persons with total assets of not less than USD5,000,000;
  • provide fund management services only within their corporate group; or 
  • are regulated in respect of securities investment business by a recognised overseas regulatory authority in the country or territory in which the securities investment business is being conducted; 

they qualify for an appropriately less onerous registration regime and are not required to obtain a licence under the Securities Investment Business Law. The registration process takes approximately four to six weeks, costs USD6,098 initially and annually, and entails an assessment by CIMA of the fitness and propriety of the owners and controllers of the fund manager. 

Wholly Exempt Persons under the Securities Investment Business Law

General partners of exempted limited partnerships, directors of companies, managers of limited liability companies and certain other constitutional operators are usually exempt from the registration and licensing regime of the Securities Investment Business Law on the basis that such operators are engaged in own account activity. No notification or registration requirement applies.

Licensing under the Securities Investment Business Law

The licensing regime is less commonly used, with only 36 licensees as at 31 March 2019. The licensing costs are approximately USD10,000 – 20,000 depending on the precise activities of the investment manager, and the assessment by CIMA will extend to the knowledge, skills and experience of the staff of the fund manager, with licensees being subject to prudential registration. Registrants and licensees under the Securities Investment Business Law, which are formed as companies, are required to have no less than two directors or managers. CIMA has broad supervisory powers over registrants and licensees. Licensed managers, though not registrants, are under additional CIMA filing obligations if they provide services to funds which are managed or marketed in the EU/EEA.

Minimal Further Regulatory Intrusion

The following further regulatory laws generally apply to fund managers, although their incremental impact is limited relative to ordinary compliance processes:

  • AML/CFT – Cayman Islands fund managers are subject to international standards in respect of anti-money laundering, countering terrorist financing and anti-proliferation financing controls, including the adoption of compliance procedures and the appointment of compliance officers; 
  • FATCA/CRS – Cayman Islands fund managers are subject to international standards in respect of the automatic reporting of tax information under FATCA and CRS. See 4.8 FATCA/CRS Compliance Regime
  • Data Protection Law – on 30 September 2019, the Cayman Islands Data Protection Law came into force. It requires Cayman Islands fund managers to observe the requirements of the Data Protection Law in respect of personal data streams that arise in the context of their fund management business and over which they are considered to be data controllers; 
  • Directors Registration and Licensing Law – the directors or managers to a corporate fund manager registered or licensed under the Securities Investment Business Law are required to be registered with CIMA. The position is substantially the same as that set out in 2.3 Regulatory Regime for directors to funds; 
  • Local Business Licensing – Cayman Islands fund managers are not subject to Cayman Islands Local Companies Control Law (relating to local business ownership) or the Trade and Business Licensing Law (relating to the licensing of domestic business); and
  • Country-by-Country Reporting – Cayman Islands fund managers fall outside  the Country-by-Country tax information reporting regime unless they form part of a multinational group with revenues of USD850,million per annum or more.

There is no investor protection scheme in the Cayman Islands.

There are no taxes imposed under Cayman Islands law on the profits, income, gains or appreciations of Cayman Islands fund managers and there is no withholding in respect of any dividend, distribution or interest payment by a Cayman Islands fund manager, whether formed as a company or partnership. A fund manager formed as an exempted company, limited liability company or exempted limited partnership may obtain a tax exemption certificate – see 2.11 Tax Regime. As indicated in 4.8 FATCA/CRS Compliance Regime, Cayman Islands-based fund managers fall under the Cayman Islands FATCA and CRS tax information reporting regimes, although the registration and notification obligations are usually minimal. 

The Cayman Islands has no direct taxes and, in consequence, no concept of a “permanent establishment” for tax purposes exists under Cayman Islands law or regulation. 

Where a Cayman Islands-based fund manager provides fund management services to a foreign fund, it would typically not cause the foreign fund to establish a place of business in the Cayman Islands (or otherwise trigger the application of the regulatory laws of the Cayman Islands to the fund). The appointment of additional Cayman Islands service providers to the foreign fund, such as fund administrators or bankers, would not vary this position. 

As indicated in 4.5 Regulatory Regime, below, a foreign fund should exercise caution when effecting an offer of its equity interests to the public in the Cayman Islands as that is likely to trigger the establishment of a place of business in the Cayman Islands and the application of attendant domestic laws. Where a foreign fund is effecting investments into, or seeking to have an active business in, the Cayman Islands a number of domestic laws may apply. 

There are no such taxes in the Cayman Islands.

Fund managers licensed under the Securities and Investment Business Law must have regard to CIMA’s statement of guidance concerning prudent outsourcing. Investment managers which are registered, as opposed to licensed, under the Securities Investment Business Law are not governed by the guidance.

Under the International Tax Co-operation (Economic Substance) Law of the Cayman Islands, Cayman Islands securities fund managers that are formed as legal persons and licensed or registered under the Securities Investment Business Law should seek advice before delegating their core income-generating or other activities outside of the Cayman Islands. See below, 3.7 Local Substance Requirements.

Distinct from Cayman Islands funds, fund management is within the scope of the new economic substance regime of the Cayman Islands. Cayman Islands managers to securities funds which are formed as legal persons and licensed or registered under the Securities Investment Business Law are subject to the regime, though for certain categories of manager the regime will not be applicable until 1 January 2020. 

In brief, fund managers, relative to the terms of their engagement, are required:

  • to conduct core income-generating activities within the Cayman Islands (eg, asset management, risk, reserve and hedging assessment and regulatory and performance reporting);
  • to be appropriately directed and managed from within the Cayman Islands; and
  • to have adequate operating expense, physical presence and staff in the Cayman Islands. 

While the regime envisages that functions may be delegated, particular care should be taken in respect of delegation of core income-generating activities outside of the Cayman Islands. In order to meet the economic substance requirements, a number of managers will need to:

  • look to add local directors and locally licensed delegate managers to assist in establishing activity in the Cayman Islands;
  • narrow the roles of the Cayman Islands manager to reduce the impact of the requirements; or
  • move to restructure their business so that the manager falls outside the scope of the regime. 

Cayman Islands funds are free to appoint an investment manager located anywhere in the world. The foreign manager would, needless to say, be required to meet applicable domestic licensing and regulatory obligations in its jurisdiction of operation. As indicated under 3.4 Rules Concerning "Permanent Establishments" a foreign manager to a Cayman Islands fund is most unlikely to establish a place of business in the Cayman Islands and accordingly would not be subject to the regulatory or other domestic laws of the Cayman Islands. 

The regulatory regime of the Cayman Islands is generally designed for institutional, sophisticated and high net worth investors. As indicated above, the regime imposes no investment restrictions or onerous service provider, reporting or disclosure requirements, thus promoters are free to establish, on a flexible and low-cost basis, investment products that meet their and their clients' investment and wider business objectives. 

Funds Organised under Cayman Islands Law Marketed into Cayman

Funds organised as Cayman Islands exempted companies, unless listed on the Cayman Islands stock exchange, and Cayman Islands exempted limited partnerships are effectively prohibited from making any invitation to the public in the Cayman Islands to subscribe for their equity interests. The expression "public in the Cayman Islands" is not comprehensively defined and thus would be given its ordinary, common law meaning, though it would exclude exempted companies, exempted limited partnerships, foreign registered companies or partnerships, and similar investment vehicles.

Cayman Islands funds organised as unit trusts are not subject to any direct prohibition on the offering of their equity interests to the public in the Cayman Islands, however, they typically exclude investment from persons resident or domiciled in the Cayman Islands (other than Cayman Islands exempted companies or non-resident companies) in order to obtain a tax exemption certificate, as well as on wider investor suitability grounds. 

Funds Organised under a Foreign Law Marketed into Cayman

Refer to 4.5Regulatory Regime, below.

Firms Marketing Cayman Islands Funds or Foreign Funds in the Cayman Islands

A fund placing an agent or distributor which is organised, or otherwise establishes a place of business, in the Cayman Islands, is subject to the regulatory regime established under the Securities Investment Business Law, which requires the placing agent or distributor to obtain a licence from CIMA unless a registration or other exemption from licensing applies. See 3.2 Regulatory Regime for a brief summary of the licensing and registration process which applies equally to placing agents and distributors.

Typically, a placing agent or distributor subject to the Securities Investment Business Law would fall within the registration regime by:

  • limiting placing or distribution services to funds comprising high net worth or sophisticated investors;
  • being regulated by a recognised overseas regulatory authority; or
  • providing services to group affiliates only. 

A placing agent or distributor of equity interests which is duly licensed or registered under the Securities Investment Business Law is exempt from the Local Companies Control Law and Trade and Business Licensing Law which would otherwise regulate on Island activity. 

The activity of placing agency or distribution in respect of equity interests does not fall under the economic substance regime of the Cayman Islands.

There are no restrictions on the investment by Cayman Islands resident individuals or companies in alternative funds established in the Cayman Islands, except as indicated under 4.2 Marketing of Alternative Funds:

  • no offer should be made to the public in the Cayman Islands by an exempted company or exempted limited partnership fund; and
  • a unit trust fund holding a tax-exemption certificate should not issue units locally other than to Cayman Islands exempted companies or non-resident companies.

There is no restriction on the investment by Cayman Islands resident individuals or companies in funds organised outside of the Cayman Islands.

Funds Established in the Cayman Islands

In respect of funds established in the Cayman Islands, there are no registration or filing requirements relating generally to the marketing of equity interests within the Cayman Islands. As noted under 2.3 Regulatory Regime, open-end funds established in the Cayman Islands are required to be registered or licensed under the Mutual Funds Law upon commencement of business, which would include the commencement of material marketing operations. Cayman Islands funds are subject to the marketing restrictions set out in 4.3 Rules Concerning Marketing of Alternative Funds, above.

Foreign Funds Which Do Not Make a Public Offer

A foreign fund (whether open or closed-end) which does not offer its equity interests to the public in the Cayman Islands but which makes a private offer and otherwise avoids creating a place of business in the Cayman Islands, is not required to register or be licensed under the Mutual Funds Law or any other regulatory law of the Cayman Islands. In this section 4.4, "the public in the Cayman Islands" generally excludes exempted companies, exempted limited partnerships, foreign-registered companies or partnerships and similar vehicles (and, depending on the circumstances, sophisticated persons and high net worth persons). If the fund is a company, it will need to register as a foreign company by filing basic particulars with the Registrar of Companies of the Cayman Islands. 

Public Offers by Foreign Open-end Funds

A foreign open-end fund which offers its securities to the public in the Cayman Islands is required to register under the Mutual Funds Law, as explained in 2.3 Regulatory Regime. An exemption to the registration obligation arises where the foreign open-end fund appoints a placing agent or distributor which is licensed under the Securities Investment Business Law. An open-end fund which makes a public offer in accordance with the Mutual Funds Law (and otherwise avoids creating a place of business in the Cayman Islands) will generally not be subject to any further regulatory laws of the Cayman Islands. If the foreign fund is formed as a company, it will need to register as a foreign company by filing basic particulars with the Registrar of Companies of the Cayman Islands. 

Public Offers by Foreign Closed-end Funds

A foreign closed-end fund which offers its securities to the public in the Cayman Islands is likely thereby to establish a place of business in the Cayman Islands, and should therefore either request voluntary registration under the Mutual Funds Law (ie, to be treated as an open-end fund) or assess whether any other domestic regulatory laws apply. If the fund is a company, it will need to register as a foreign company by filing basic particulars with the Registrar of Companies of the Cayman Islands. 

Funds are required to ensure that the offering materials:

  • are true, accurate and not misleading;
  • disclose applicable fees, costs, expenses and conflicts of interest;
  • describe the equity interests in all material respects; and
  • contain such other information as is necessary to enable a prospective investor to make an informed decision as to whether or not to invest.

Subject to the above general disclosure standard, Cayman Islands law does not prescribe any other specific disclosures.

As indicated in 2.11 Tax Regime, there are no taxes imposed under Cayman Islands law on the profits, income, gains or appreciations of Cayman Islands funds and there is no withholding in respect of any dividend, distribution or interest payment by a Cayman Islands fund. Accordingly, as a matter of Cayman Islands law, there is no taxation on the equity interest of any investor, wherever they are located and irrespective of the legal form of the fund or the investor. 

The Cayman Islands has implemented a legal and regulatory regime which the Organisation for Economic Co-operation and Development (OECD) has recognised as generally complying with the latest internationally agreed standards for transparency and disclosure of information for tax purposes. As part of this, the Cayman Islands has entered into over 30 bilateral tax information exchange or disclosure agreements with foreign jurisdictions. Historically, such intergovernmental agreements have typically related to provision of information upon a specific request by a foreign tax authority, however, more recent intergovernmental agreements entered into by the Cayman Islands provide for the automatic collection and disclosure to foreign tax authorities of financial information relating to investors.

In particular, the Cayman Islands has entered into and implemented an intergovernmental agreement with the United States (FATCA) and has also entered into and implemented similar arrangements pursuant to the OECD's Standard for Automatic Exchange of Financial Information in Tax Matters, commonly known as the common reporting standard (CRS), which currently has over 100 jurisdictions providing for the collection and automatic disclosure of information for tax purposes in relation to investors in Cayman Islands funds.

Cayman Islands fund structures are almost invariably classified as “financial institutions” for the purposes of FATCA and the CRS and, unless an exemption applies, they are required to:

  • obtain a Global Intermediary Identification Number from the United States Internal Revenue Service;
  • register with the Cayman Islands Tax Information Authority and for that purpose, appoint a Principal Point of Contact and Authorising Person;
  • collect investor identification and investment value data for annual filing with the Cayman Islands Tax Information Authority (with filings due in respect of each year, and due in May the following year); and
  • establish written policies and procedures in respect of CRS compliance.

The Cayman Islands regimes operate on the basis that:

  • the obligations are established under Cayman Islands law;
  • reporting obligations are owed to the Tax Information Authority; and
  • the Cayman Islands does not receive reciprocal information from the United States or the CRS participating jurisdictions. 

In practical terms, fund administrators are accustomed to dealing with the practical application of FATCA and the CRS. Fund offering materials are routinely designed to collect the necessary investor identification data, and the fund administrator’s accounting service will include the collation of the relevant investor balance and distribution data. 

The regimes provide for certain narrow exemptions, including an exemption for funds regulated under the Mutual Funds Law which are entirely held by other financial institutions. 

The regimes also apply to fund managers, though where a manager holds no client assets, whether on its balance sheet or in a client omnibus account, and only provides services to other fund structures reporting under FATCA and the CRS, then usually the fund manager has a one-off notification obligation with the Tax Information Authority and no reporting obligations. 

Travers Thorp Alberga

103 South Church Street
Harbour Place, 2nd Floor
PO 472
George Town
Grand Cayman
KY1-1106
Cayman Islands

+345 949 0699

+345 949 0871

rmansi@traversthorpalberga.com www.traversthorpalberga.com
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Law and Practice

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Travers Thorp Alberga Attorneys-at-Law is a boutique Cayman Islands and British Virgin Islands law firm designed for the post-financial crisis environment. It has highly experienced partners who specialise in structuring complex funds and advising on related regulatory issues. From their offices in Grand Cayman, the British Virgin Islands, Hong Kong and Australia, they provide incisive and effective advice to the highest standard for all types of offshore entity, including hedge funds, private equity funds, corporate and partnership vehicles, asset and structured finance vehicles, cryptocurrencies and ICOs.

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